Taxing Business Incomes: Evidence from The Survey of Consumer Finances

In this policy brief, we explore the tax implications of the fact that most of the economic income generated by closely held businesses (that is, businesses other than corporations) in the United States does not show up on tax forms. Understanding the sources of this discrepancy—including tax laws, non-compliance, or differences in reporting of business losses—can have first-order implications for measuring and interpreting trends in the distribution of income and wealth. For example, determining the distribution of “missing” business income plays an important role in estimates of how top income shares have evolved over time (Auten and Splinter 2019; Kopczuk and Zwick 2020; Piketty, Saez, and Zucman 2018; Sabelhaus and Park 2020). Likewise, to the extent that the distribution of wealth is inferred by capitalizing income flows that appear on tax forms, the difference between economic income and tax-based income definitions could bias the results (Bricker et al. 2016; Saez and Zucman 2016; Smith, Zidar, and Zwick 2021).